Open & closed end funds

An investment or ‘closed end’ trust is a public company whose business is to invest in other companies. It holds a portfolio of investments in the same way a unit or ‘open end’ trust does, and it is professionally managed by a fund manager. But instead of buying fund units from a private company, as you would with a unit trust, you invest by buying shares in the same way you would in a quoted company.

When valuing the shares of an investment trust, investors will look at the value of the investments held, subtract any liabilities, and divide that number by the number of shares in issue to get the ‘net asset value per share’ (NAV).

It is common for the share price of an investment trust to trade at a discount to that NAV. Units in unit trusts always trade at exactly their NAV because, rather than having a pre-set amount of capital and hence being at the mercy of the market, unit trusts can create new units and cancel existing ones as demand dictates.

• See Tim Bennett’s video tutorial: Investing in funds – why we prefer investment trusts.

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